Halister News

(Bloomberg) -- UST 10Y futures have shown “characteristics of a bull market, with open interest increasing with rising prices,” BNP Paribas strategists Timothy High and Daniel Totouom-Tangho say in Feb. 4 note.

• “Similar to the Bund market, Treasuries may be vulnerable to a pullback,” and “a turn in prices may lead to a potentially painful liquidating selloff”
• Also, most of the yield declines this year have been on “narrowing inflation breakevens, leaving real yields lower by only half the move in nominal yields,” which may indicate some market participants find the rally “a little dubious”
• If risk assets continue to stabilize, breakevens may widen further and push nominal yields higher
• However, “continued deterioration” could lead to a fresh fall in nominal yields if real yields drop, while “breakevens would not need to fall”
• BNP was stopped out of UST 2Y short recommended Dec. 3

(Bloomberg) -- Convexity risk will remain muted unless the 10Y yield drops to 1.75%-1.80% range and remains there, write BNP Paribas MBS strategists Sarah Hu and Philip Patterson in a research note.

• Chief reason convexity hedging has remained muted is Fed monetary policy has kept rates and volatility “artificially low”
  • Fed is largest owner of agency MBS ($1.7t, ~27% of universe) and doesn’t hedge its holdings
• Prepay risks more driven by policy risks than interest rate risk over recent years
• Ownership profile of MBS universe has switched to entities that don’t hedge such as central banks
  • GSEs, who do hedge, have seen holdings decline
  • Some commercial banks, servicers, REITs, primary dealers do hedge; originators likely don’t need to fully hedge books due to natural hedging created by their pipelines and MSR
    • Investors that hedge hold ~32% of universe, non- hedgers 68%
• Top ten mortgage servicers in 2011 were all banks, by 2015 half were non-bank servicers
  • Non-banks “may not have infrastructure or expertise” to hedge in the same manner as large banks
• Current S-curve flat compared to past levels; 2015 curve flatter than both 2012/2013
  • 100bps ITM FN30 (12-24 WALA) speeds 23 CPR in 2015 vs 25 CPR in 2013, 27 CPR in 2012
    • 50bps OTM speeds were 1-2 CPR faster in 2015 than in 2013/2012
• 4% mortgage rate has 38% of universe at least 50bps ITM, at 3.60% rises to 62%
  • Accounting for credit criteria those numbers are 27%/49%
  • Assuming 30% of investors actively hedge, convexity hedging needs ~$104b in 10Y equivalent for 50bp 10Y rally, ~$50b for 25bp rally
• “Would not be surprising” to see increase in hedging needs as rates rally as MBS tend to be under-hedged in range- bound, low vol. world

(Bloomberg) -- Recommend taking profit on small long G-4 duration for now, looking to reset at better levels; bond rally is set to pause as risk assets temporarily consolidate, SocGen analysts including Vincent Chaigneau write in note.

• Bond rally unlikely to extend before G-20 meeting on Feb. 26-27 given oil-price rebound, dovish central banks (positive for risk sentiment)
• Long-end supply has weighed on the back-end of OAT curve; substantial concession should retrace, further ECB easing should encourage continued spread compression
  • Recommend long OAT 2038 vs bund 2037 at 72bps in ASW; target 60bps, stop 80bps
  • Recommend long OAT 2038 vs OAT 2045s at 15bps in ASW; target 18bps, stop 13bps
• Recent selloff in bank stocks amid concern about exposure to EM credit has resulted in widening of FRA/OIS bases
  • Recommend FRA/Eonia basis IMM2-IMM6 steepener at 0.3bps as a hedge against further weakening in banks stocks, EM credit; trade may also benefit from a multi-tier ECB cut

--AMY THOMSON

(Bloomberg) -- While some commentators suggest BOE may lift rates to defend the pound were the U.K. to vote to leave EU, the events of 1992 suggest the opposite may be true, Jefferies analysts led by David Owen write in client note.

• Faced with a deteriorating economy, the immediate policy is more likely to be about cutting rates, or resuming QE
• U.K. policy makers would more than likely welcome a lower pound given the openness of the economy
  • If currency weakness was to turn into a rout, that would be a completely different story
• Gilt-market liquidity may be an issue were the U.K. to vote to leave, given two European banks have already pulled out of primary dealership
• NOTE: If U.K. voted to leave, BOE might have to raise interest rates even in the face of a downturn in investment, former deputy governor John Gieve said Tuesday